Alternative Investments Q69

0. SHM Capital is a hedge fund with $200 million of initial investment capital. They charge a 3 percent management fee based on assets under management at year-end and a 15 percent incentive fee. In its first year, SHM Capital has a 28 percent return. Assume management fees are calculated using end-of-period valuation. In the second year, the fund value declines to $225 million. In the third year, the fund value increases to $250 million. If the incentive fee is calculated net of the management fee, and also includes the use of a high water mark, the fees earned by SHM in the second year is closest to:

Answer
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Option : C
Explanation : Management fee = $225million ∗ 0.03 = $6.75million management fee
No incentive fee because the fund has declined in value
Total fees to SHM Capital =$6.75million

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